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Brealey. Myers. Allen Chapter 34 Solution - CHAPTER 34...

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1 CHAPTER 34 Governance and Corporate Control Around the World Answers to Practice Questions 1. a. While it is true that managers have a fiduciary duty to shareholders, it is human nature for managers to put their own interests ahead of those of the stockholders when there is a conflict in objectives. It is impossible for stockholders to monitor the actions of all managers at all times, so agency problems are inevitable. b. The types of mechanisms used to keep agency problems under control generally involve monitoring of management, contracts that relate management compensation to firm performance, and market mechanisms such as takeover threats and competition in the market for managerial employees. 2. Other financial intermediaries include insurance companies, mutual funds and pension funds. In Japan, banks provide relatively more financing than do other financial intermediaries, while in the U.K., other financial intermediaries provide substantially more financing. In the U.S., banks are less important sources of financing compared to financial intermediaries, and in Europe, financing provided by banks and financing provided by other financial intermediaries are approximately equal. 3. Transparency is essential in a market-based system, but is not necessarily a requirement for a bank-based system. In a bank-based system, banks have long-standing working relationships with the companies seeking financing, and banks have on-going access to information about the firm. In a market-based system, creditors and equity-holders require that financial information about companies seeking financing be available, sufficiently detailed and accurate if they are to participate in the market.
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